One of, if not the most common news topic over the last month has revolved around the negotiations and eventual passing of a new U.S.debt limit. We at YTS feel it is important to revisit what happened, the potential ramifications, and how to plan your retirement for the next debt limit occurrence. As a recap - The debt limit is the total amount of money that the United States government can borrow to meet its obligations. These obligations include Social Security and Medicare benefits, military salaries, interest on debt, various tax refunds, and other scheduled payments. The debt limit currently stands at $31.4 trillion with limits in place since 1917, and since WWII having been raised or suspended 102 times – the last being in 2021. A default, whether perceived or actual, would have serious negative economic ramifications.
A default does not mean the U.S. is bankrupt but instead would need to negotiate new debt repayments with its creditors. A default would produce chaos in the global financial markets as both domestic and international markets depend on the relative stability of U.S. debt and the U.S.economy. Interest rates across the economy would also increase, affecting loans, credit cards, mortgages, and business borrowing or investment, and contribute to plunging bond prices. The balance sheets of lending institutions holding Treasuries would decline and potentially tighten the ability to obtain credit. Faith in U.S. Treasuries would be lost as they would no longer be considered perfectly safe. This loss of faith did occur in 2011 and 2013 when the U.S. government raised the debt ceiling just 2 days before the Treasury was expected to exhaust its options. Standard & Poor’s then downgraded the U.S.credit rating to AA+ from AAA. Programs like Social Security could also delay payments to retirees for an unknown period. A Moody’s Analytics report in 2023estimated that a default could have economic consequences like the GreatRecession: such as a 4 percent Gross Domestic Product (GDP) decline, nearly 6million lost jobs, and an unemployment rate of 7 percent. In addition, Moody’s would expect a $12 trillion loss in household wealth, with stocks dropping by as much as one-third at their deepest point, potentially frightening investors into withdrawing from the stock market. Regardless of the depth, recessions have historically hurt traditional investment returns and in turn, harmed the retirement prospects of millions of Americans.
The good news – the debt limit has been suspended throughJanuary 1, 2025, coincidentally, meaning that Congress will not need to address this issue again until after the 2024 elections. As is often the case, partisan agendas dominate the news from time to time. In the end, stock market expectations were realized, and the issue was resolved before any economic consequences. It is important to maintain a sense of perspective as the debt limit topic is a reoccurring one that has been addressed numerous times. These market fluctuations serve as a reminder that such events represent just one factor to consider as you assess how your own portfolio and retirement planning strategy is positioned for your long-term financial goals. Acknowledging that events such as the debt ceiling do reoccur does not mean that YTS is unable to help you in minimizing the impact on your retirement plans should the worst fears of a default ever be realized:
• Stay informed – There will always be noise in the media around topics such as the debt ceiling and the implications. Consider consulting with an experienced planning team who can provide personalized guidance based on your specific situation.
• Focus on your long-term strategy – Regardless of the headlines, it is always wise to have a robust and personalized financial plan in place to follow, especially when markets are volatile. Succumbing to emotion-driven decisions can have an irreversible effect on your future cashflows and retirement lifestyle.
• Evaluate your cash reserves – This includes keeping an emergency fund for unexpected expenses that align with your comfort level and needs. By having liquid capital set aside, you can avoid decisions based on emotion, avoid selling at a loss, and better withstand economic fluctuations.
• Diversify – It is essential to take into consideration every account and asset to protect and grow your wealth. This includes diversifying your investments across non-correlated assets and strategies to ensure your portfolio is aligned with your risk tolerance and objectives.
A note: One common pitfall to avoid is utilizing multiple advisors that are unaware of your other assets. While utilizing multiple advisors may feel like diversification, these advisors often utilize similar strategies resulting in overexposure to asset classes and unseen deviations from your risk tolerance. YTS is highly experienced in identifying these redundancies and is happy to extend this second set of eyes to you and your circle.
While traditional investment and planning guidance can still assist in protecting your retirement from the next debt ceiling instability, the world of investing is no longer just stocks, bonds, and mutual funds. There are many alternative strategies, products, and platforms that can greatly reduce your portfolio's sensitivity to headline-based market volatility. Should you feel your advisor was simply “staying the course” with a percentage-based asset allocation through the debt ceiling headlines, it may be worthwhile for you and your loved ones to treat your money as you would your critical healthcare and seek a professional second opinion from YTS Wealth Management.
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.